Life Settlements: What Accredited Investors Need to Know Before Buying Someone Else's Policy

A 78-year-old policyholder wants out of a $1 million universal life policy she no longer needs. Her insurer offers her $24,360 to walk away, the cash surrender value. Instead, she sells the policy on the secondary market for $212,066. That's not a hypothetical. It's the average spread reported across the industry in 2025, according to the Life Insurance Settlement Association's 2025 Annual Market Data report. Sellers walked away with nearly 9 times what their insurer offered. Buyers, often funds serving accredited investors, picked up a discounted claim on a future death benefit, betting on actuarial tables instead of the stock market.

This is the life settlement market: a legal, licensed, regulated secondary market where consumers sell unwanted life insurance policies for cash, and investors buy the right to collect the death benefit later. It's been around since a 1911 Supreme Court case, Grigsby v. Russell, established that a life insurance policy is personal property you can sell. It's grown into an industry that paid consumers $626.6 million in 2025 alone. And it comes with a cautionary tale that every accredited investor should know before writing a check: GWG Holdings, a company that raised $1.6 billion from retail investors and collapsed into bankruptcy in 2022.

You should understand three things before you go any further. First, this asset class is genuinely uncorrelated to stock and bond markets. A policy pays out when someone dies, not when the Fed moves rates. Second, the entire return depends on a number nobody can verify with certainty: how long the insured person will live. Third, how you access this market, whether through direct policy purchase, an institutional fund, or a retail bond structure, determines whether you're taking underwriting risk, leverage risk, or both. Get the structure wrong and you can lose your principal even if the underlying asset class performs exactly as designed.

How a life settlement transaction actually works

A life settlement is the sale of an existing life insurance policy by its owner to a third party for a lump sum that's more than the cash surrender value but less than the net death benefit. The seller is typically 65 or older, often with a health condition that has shortened their expected lifespan since the policy was issued. The buyer takes over premium payments and collects the full death benefit when the insured dies.

Here's the mechanics, step by step.

Origination and licensing. The transaction starts with a licensed life settlement broker, who represents the policyholder (the seller) and has a fiduciary duty to secure the best price. Roughly 40 states regulate life settlement brokers and providers directly, requiring licensing, disclosure forms, and rescission periods, a framework the National Association of Insurance Commissioners tracks state by state. The broker shops the policy to licensed providers, companies like Coventry, one of the longest-operating providers in the space, who represent buyers or buy for their own portfolios.

Underwriting: the life-expectancy report. This is the step that decides whether the deal makes money. Independent medical underwriting firms review the insured's full medical history, current health status, and family history, then issue a life expectancy (LE) estimate, a probabilistic forecast, expressed in months, of how long that specific person is likely to live. Two independent underwriters typically produce separate LE reports; the provider usually averages or blends them. This LE number becomes the single most important input in pricing the policy. A firm called Lapetus Solutions was one of several underwriters whose methodology came under scrutiny in later years, a preview of the risk section below.

Valuation. Pricing a life settlement means running a discounted cash flow: the buyer estimates total future premium payments required to keep the policy in force until the projected death, subtracts that cost (plus a servicing and profit margin) from the net death benefit, and discounts the result back to present value using a target internal rate of return. Move the LE estimate by a few months in either direction and the price, and the eventual investor return, swings meaningfully.

Closing and servicing. Once a price is agreed, the seller signs the policy over, the buyer (or the fund holding the policy) becomes the new owner and beneficiary, and a servicing company tracks premium due dates and periodically checks on the insured's status. From here it's a waiting game: the investor pays premiums until the insured passes away, then files the death claim with the insurance carrier.

What the market actually looks like right now

The numbers are public and updated annually by the industry's primary trade association, the Life Insurance Settlement Association (LISA). According to LISA's 2025 data, member companies paid $626.6 million to consumers across 2,955 transactions in 2025, up 9.48% year over year. Since 2021, LISA members have paid a cumulative $3.6 billion to consumers across roughly 15,000 policies. The average settlement payout was $212,066, against an average insurer-offered cash surrender value of just $24,360.

On the return side, life settlement funds have historically marketed net investor targets in the 8% to 12% IRR (internal rate of return) range, IRR being the annualized return a fund needs to hit to match the timing and size of its cash inflows and outflows. That target isn't marketing fiction. An academic study published in 2014 examining 7,890 individual life settlement policies with a combined net death benefit of $21 billion found an average expected IRR of 12.5% across the sample.

That 12.5% number is the headline. The footnote matters more: the same study found that extending the life-expectancy estimate on those policies by just 36 months, three extra years of premium payments and delayed payout, cut the average expected IRR from roughly 12.5% down to about 3.2%. That's not a rounding error. That's the entire investment thesis compressing by more than 9 percentage points because one input, life expectancy, moved. Keep that number in your head for the risk section below.

Life settlements sit in a broader alternative investments category that AIN's alternative investments coverage tracks regularly, assets whose returns aren't driven by public market sentiment, but which typically carry illiquidity, valuation opacity, or structural risks that don't show up in a stock quote.

How accredited investors actually get exposure

You generally can't call your insurer and buy a stranger's policy directly. The market runs through intermediaries, and the structure you choose changes your risk profile substantially.

Institutional and private funds. Most accredited investor access runs through private placement funds, typically structured as Reg D offerings under the Securities Act, sold only to accredited investors, and managed by firms that specialize in sourcing, underwriting, and servicing life settlement portfolios. Firms like SL Investment Management build diversified pools of dozens or hundreds of policies specifically to reduce the single-policy longevity risk described above. If one insured lives longer than projected, the fund's other policies smooth the impact. These funds typically carry multi-year lockups, since the underlying asset (a life insurance policy) has no public secondary market of its own.

Direct policy purchase. Sophisticated investors and family offices sometimes buy individual policies or small tranches directly through a licensed provider. This maximizes control and potential return but concentrates longevity risk in a handful of names, exactly the scenario the 36-month LE study above should make you nervous about.

Publicly traded operators. Some companies in this space, such as Abacus Life / Abacus Global Management, are themselves publicly traded, giving investors indirect, liquid exposure to a life settlement origination and servicing business rather than to a specific pool of policies. That trades one risk (illiquidity) for another (equity market risk and company-specific execution risk, including the underwriting controversy discussed below).

Retail bond structures: the GWG model. This is the structure that failed publicly, and it's worth understanding exactly how it differed from a straight fund. More on that next.

Regulatory oversight here runs through both federal securities law, including the accredited investor standard the SEC defines for private placements, and state insurance regulation of the underlying settlement transactions. Investors should always confirm a fund's private placement memorandum, audited financials, and the licensing status of the underlying settlement provider, the kind of diligence AIN's regulatory compliance guides walk through in more detail for private placement offerings generally.

The GWG Holdings collapse, and the other risks you need to sit with

I want to be direct about this because it's the single most important cautionary tale in this asset class's history, and it's recent enough that plenty of investors are still recovering pennies on the dollar.

GWG Holdings was a Dallas-based company that raised money from investors by selling a proprietary bond product called "L Bonds," using the proceeds to buy life settlement policies. On paper, the pitch resembled the funds described above: uncorrelated returns, backed by real death-benefit assets. In practice, the structure was materially different and far riskier. GWG used investor capital not just to buy policies but to pay earlier investors and fund operations, layered in significant debt, and faced an SEC investigation into its disclosures. According to InvestmentNews reporting from April 2022, GWG had sold roughly $1.6 billion in L Bonds to investors, many of them retail, brought in through independent broker-dealers, before filing for Chapter 11 bankruptcy. Estimated recovery for bondholders: 20 to 30 cents on the dollar. The company's outside auditor, Grant Thornton, and its placement agent, Emerson Equity, both faced scrutiny and litigation in the aftermath.

The lesson isn't "life settlements are a scam." The underlying policies GWG held were real, licensed, legitimate assets. The lesson is that the wrapper around the asset, how much leverage it carries, whether it's paying old investors with new investor money, how transparent its disclosures are, can turn a reasonable asset class into a catastrophic loss. Before you invest a dollar in any life-settlement-linked product, ask exactly how it's structured, whether it uses leverage, and whether the entity has been the subject of SEC inquiry or state securities enforcement action.

Beyond structural risk, three other risks are inherent to the asset class itself, no matter how clean the wrapper:

• Longevity risk. The insured living longer than projected is the single biggest threat to returns, as the 36-month IRR study above demonstrates starkly. Medical advances, misdiagnosed conditions, or simple underwriting error can all extend a life expectancy estimate well past what the pricing model assumed.
• Life-expectancy underwriting errors. This isn't theoretical. In 2025, the research firm Morpheus Research published allegations against Abacus Global Management concerning its life-expectancy underwriting practices and valuation methodology, a reminder that even publicly traded, established operators face real questions about how accurately they're pricing mortality risk. Investors should treat any single LE estimate as a probability, not a guarantee, and favor managers who use multiple independent underwriters and disclose their methodology.
• Illiquidity. There is no public exchange where you can sell your fund stake or your policy interest next week if you need cash. Capital is typically locked up for years, tied to actual mortality timing you cannot control or predict with precision.

And then there's the ethical dimension, which deserves a plain acknowledgment rather than a euphemism: this asset class generates investor returns when someone dies, and the return is generally better for the investor the sooner that happens. The industry's standard defense is that the seller volunteers, gets independently appraised value far above what their insurer would pay, and retains no ongoing insurable interest concern once state-licensed brokers and rescission periods are followed. That defense has legal and consumer-protection weight behind it: the licensing regimes exist precisely because regulators have scrutinized this dynamic. But you should go in with eyes open about what you're actually buying, a claim that pays out on a death, priced by estimating how soon that death will occur. If that structure doesn't sit right with you, this isn't the alternative asset for you, and that's a legitimate reason to pass.

What to watch next

If you're an accredited investor considering this space in the second half of 2026, watch three things. First, LISA's next annual market data release. If consumer payouts keep climbing (they were up 9.48% in the most recent report), it signals more sellers are becoming aware of the settlement option relative to lapsing or surrendering policies, which should mean more deal flow for funds to underwrite carefully rather than chase. Second, keep an eye on how the Morpheus Research allegations against Abacus Global Management resolve. The outcome will tell you a lot about how rigorously the industry's underwriting practices hold up to outside scrutiny into 2027. Third, before committing capital to any specific fund or bond product, get the fund's audited financials, ask directly whether it uses leverage or pays distributions from new investor capital, and check state insurance department licensing for every provider in the chain. The GWG collapse was preventable with exactly that level of diligence applied before the check was written, not after the bankruptcy filing.

This is a real, licensed, decades-old market with genuine diversification value. It is not a shortcut, and it is not free of the kind of structural risk that took down a $1.6 billion bond program in 2022. Treat the return target as a probability distribution, not a promise, and you'll be underwriting the deal the same way the professionals are supposed to.

Author Disclosure: Jeff Barnes, MBA has no personal position in any company, fund, or platform named in this article. Angel Investors Network has no current commercial relationship with any party mentioned. AIN provides marketing and education services, not investment advice. Past performance does not guarantee future results. All investments involve risk, including loss of principal.